Roadmap to the Winners and Losers in the Auto Industry Under Trump

From NAFTA to EPA regulations to tax reform, the wide variety of policy reforms raised by President Trump may have significant impact on the global auto industry across all sectors.

Throughout his campaign, and since assuming office, President Trump has prioritized reforms to numerous policies while offering few specifics. Included among these are NAFTA, global warming, EPA regulations, tax reform and import tariffs.

While seemingly disparate, changes to any one of these policies could significantly impact the U.S. and global automotive industry. Quite understandably, this brushstroke approach has unsettled automotive manufacturers and auto suppliers who are concerned about the potentially debilitating and costly effects on their businesses. Consider, for instance, the President’s reference to slapping tariffs of 35% on goods imported from Mexico. As a low-cost source for parts and components that help make U.S. plants globally competitive, dunning Mexican imports might in fact make the U.S. supply value chain less competitive.

To be sure, Trump’s priorities are rooted in benefiting U.S. manufacturing and by extension, U.S. workers, businesses and taxpayers. But the uncertainty surrounding the potential reforms — will they get through Congress and how extensive will they be — augmented by Trump’s own unpredictable negotiation tactics, has left the global automakers and supply bases wondering who will be the winners and losers when reform arrives.

That’s an important question to ask in an industry in which new product development takes three to five years and programs are capital intensive. In fact it’s still too soon to fully answer. But by looking at how Trump’s potential reforms might impact the auto industry, we can get a better idea on the immediate and long-term effects.

If EPA Regulations Are Rolled Back

Rolling back EPA regulations that include CAFE (Corporate Average Fuel Economy), Greenhouse Gas (GHG) and CO2 emission standards (see inset) may create short term winners among some carmakers, but would have wide-ranging implications for automotive technology companies such as Bosch, Continental and Denso. It would also impact alternate technology suppliers in the electric and hybrid vehicle sector.

For years, working towards CAFE and CO2 standards for 2025 has motivated auto companies to invest in small cars, alternate fuel technologies (electric, hybrid, fuel cell) and powertrain technologies like turbochargers, gasoline direct injection and exhaust after-treatment. Moving away from the standards would reset the timelines for both the technologies and the benefits (fuel efficiency, pollution control and oil independence).

CAFE and CO2 Emission Standards

CAFE and Greenhouse Gas emission standards are developed jointly by EPA and the National Highway Traffic Safety Administration (NHTSA). The standards set fuel economy to a fleet average of 54.5 miles per gallon and CO2 emission to 163 grams/mile in 2025. EPA project that US drivers will enjoy a benefit of $1.7 trillion in fuel costs saving and reduce America’s dependence on oil by more than 2 million barrels per day in 2025.

It’s important to note that CAFE and GHG standards have compelled automakers to increase sales of smaller autos, which are more fuel efficient but less profitable. Relaxing or deferring the standards will shift the focus back to sales of more profitable sport utilities and light trucks with lower fuel economy and higher emissions. Though some automakers may gain from that move, many Tier 1 technology suppliers will be impacted by a delayed return on investment for technologies they have designed to meet CAFE and emission standards.

If NAFTA is Renegotiated

The current NAFTA dialogue may have created a perception that the U.S. auto industry has almost entirely relocated to Mexico. The reality is that the United States has ten times the number of auto operations as Mexico — 8,000 versus 750 as of 2015.1 And while some auto components are manufactured in Mexico, the majority of U.S. vehicles are produced in the United States.

Changes to NAFTA that revert some manufacturing to the U.S. or impose tariffs on goods would negatively impact the auto industry’s growth trajectory as well as its ability to align with CAFE targets as the rest of the world moves towards greater fuel efficiency and hybrid models. Already many EU countries have boosted fuel economy and reduced emissions in the CAFE range. France, Spain and The Netherlands, for instance, all have a 2015 fleet average of greater than 50 mpg,2 with CO2 levels of less than 168 g/mile.3 By comparison, the U.S. Light Truck CAFE is at 25 mpg and CO2 at +200 g/mile.

If the U.S. auto industry fails to achieve improved fuel economy and lower emissions, it risks falling behind globally. But the ultimate losers will be the general public, and especially inner city populations, which suffer the ill effects of air pollution. There are no winners in this scenario.

If the U.S. Gets Into a Trade War with China

There has been a great deal of commentary since Trump’s candidacy about trade imbalance with China and prospective remedies, including the imposition of tariffs on imported goods. Such a proposal would have significant implications for the auto industry. China offers the largest growth for both automakers and components suppliers with an established localization strategy for serving emerging markets in Europe and South America.

This localization strategy shifts production from an export model to one that relies on regional production, which brings the manufacture of vehicles closer to the customer base it serves and links the supply chain from the various tiers of subcomponent suppliers all the way down to the raw materials level. Overall, regional production limits exposure and insulates Original Equipment Manufacturers (OEMs) from currency fluctuations, reduces transportation costs and takes advantage of local incentives.

In this regional model, mass-produced vehicles are generally only exported to countries where the economies of scale do not support a regional model. The major exception is limited production luxury, sports or other special use vehicles. Similarly, parts manufacturers seek to produce OE parts as close to the assembly plants as possible. Modern auto plants are built for just-in-time delivery of components, making long overseas supply chains costlier and riskier. Tariffs and penalties that prevent U.S. manufacturers from following this regional strategy will impact the industry’s ability to remain competitive in the global market. This in turn will create a losing scenario for both carmakers and their suppliers.

AUTO INDUSTRY IN PERSPECTIVE

Forecasting the impact of the new administration’s policies is difficult and changes must be carefully weighed against the financial impact the auto industry has on the U.S. economy. The auto industry is a big one: it employs over 700,000 people, and in addition is a huge driver of consumer of goods and services from many other sectors, contributing to a net employment in the U.S. economy of more than seven million jobs. People in these jobs collectively earn nearly $500 billion annually in compensation and generate $65 billion in tax revenues.

President Trump’s focus on job creation is commendable, but clearly comes with caveats. While waiting for the outcome of the new administration policies, auto companies can best position themselves in these ways:

Understand and anticipate the potential impact of changes to CAFE and emission standards on their growth and product commitments.

Evaluate the impact of changes to NAFTA on production and platform strategies.

Review strategies for competing effectively in China and other emerging markets.

Understand the changes taking place in the supply chain and aftermarket distribution channels and reposition to avoid negative EBITDA and cash flow impact.

Evaluate remanufacturing strategies in the context of cross-border tariffs.

CONCLUSION

Even before the administration’s plans come into focus, companies have a “need for speed.” They must be prepared to change course quickly to react to potential industry disruption and capitalize on opportunities. NAFTA, GHG, CAFE and EPA regulation reform all create winners and losers that will impact the entire automotive value chain, from supply to distribution. Understanding the implications of policy change at a granular level will in itself create new winners.

NOTES:1 Center for Automotive Research, 2015, Table 1.1; North American Manufacturing Establishments, by State and Country.2 International Council of Clean Transportation, page 89.3 International Council of Clean Transportation, page 33.